Demystifying Research & Development (“R&D”) Tax Relief

The most recently published government statistics show that by 30 June 2017 less than 25,000 SME (Small and medium-sized entities) R&D claims were made in respect of 2015/16. More worryingly for businesses local to Walpole Dunn, only 1,750 of these were made by SME businesses based in the South West.

Many might assume that the statistics are relatively respectable for an area away from the bright lights of London and the government’s flagship ‘northern powerhouse’, but the reality is a lot more concerning. The truth is, the South West is booming with innovative businesses but, as is the case across the UK, many, if not most, smaller businesses remain convinced that R&D simply cannot apply to businesses not undertaking lab-based scientific research. So, it’s time to bust some myths surrounding this underused relief.

1 – my business is too small and doesn’t spend enough to qualify for the relief

The relief is only available to companies, but any company meeting the SME criteria can qualify to make a claim for relevant activities. SME companies are those with a staff headcount under 251; turnover not exceeding €50m; and/or a balance sheet total not exceeding €43m.

When the relief was first introduced, companies had to spend at least £25,000 in order to qualify to make a claim. This rule was first reduced to £10,000 before being abolished completely for periods ending on or after 1 April 2012, meaning no claim is too small to qualify.

(Large companies can qualify for a different form of R&D relief – contact us to find out more).

2 – my business doesn’t undertake R&D activities

This is the major misconception of R&D tax relief claims. There are no restrictions on the industry or trade that a company is in, and the legislation and government guidance confirms how the relief can cover a broad range of activities:

“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.”

The relief covers projects that seek an overall advancement of existing scientific or technological knowledge, or that seek to create new, or make changes to existing, processes; materials; devices; products; or services through advances in scientific or technological knowledge.

Importantly, by its very definition, success cannot be guaranteed with R&D and so the results of R&D activities don’t impact on their ability to qualify for the tax relief. A claim in respect of an unsuccessful project is no different to one where the advance was achieved.

3 – my business has done some cracking development work, but it was based on existing technologies

It’s not only work towards new creations that qualify for R&D relief. Provided the project does more than just improve the company’s own knowledge or capability, appreciable improvements made to existing processes; materials; devices; products; or services through scientific or technological changes can also qualify.

In addition, a project that duplicates the effect of such existing items in a new or appreciably improved way can also qualify for the relief. For example, a product which has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner could qualify.

4 – my business may have been undertaking R&D activities, but not in the current or preceding year

R&D tax relief claims are made in a company’s corporation tax return and so in the first instance can be made within one year from the end of an accounting period, which is the usual time limit for submitting a corporation tax return. After this, the standard 12-month repair window can be used to amend an original tax return and include an R&D claim, technically giving you up to 24 months to make a claim.

For example, if you undertook qualifying R&D activities during your financial year ended 31 December 2016, you have the opportunity to submit a claim in respect of that year until 31 December 2018.

5 – after professional fees, the corporation tax saving would not make a claim worthwhile

The R&D relief applicable to SMEs provides an additional 130% corporation tax deduction in respect of qualifying spend. That means that for every £1 spent on qualifying R&D activities, the company can claim £2.30 for corporation tax purposes. If your company is profit making, the relief will reduce your corporation tax bill, but if your loss making (or the claim turns a profit into a loss for tax purposes) SMEs have the option of surrendering the qualifying loss in return for a tax-free cash credit.

With corporation tax rates currently at 19%, that’s an effective discount of almost 25% off your tax bill and, for those claiming the tax-free cash credit, the payment works out at 33% of the total actual spend.

At Walpole Dunn we have experience in preparing and submitting R&D claims across many industries, and in the last 12 months alone we’ve helped clients from all over the country claim back over £325,000 in tax. We currently have a 100% success rate for claims we’ve prepared and this is down to the meticulous research and investigation we do into our clients’ R&D activities, ensuring we have a full working knowledge of the great work they’ve been doing. We’re proud of our record and that’s why we would never submit a bogus claim and why our fee structure protects our clients from excessive fees in the event that a claim isn’t successful.